Can Undervalued Healthcare Stocks Add Yield To Your Portfolio?

Key Points

• UnitedHealth, Humana and Elevance Health are showing characteristics of undervalued stocks in the healthcare sector.
• Uncertainty in the healthcare industry has resulted in undervaluation, with these stocks trading below their intrinsic value.
• Despite industry headwinds, analysts anticipate improved growth in the healthcare sector in the second half of the decade.

If you had to guess the largest S&P company outside of big tech stocks or Berkshire Hathaway Inc. NYSE: BRK.B, would you guess a healthcare stock? 

Health insurer UnitedHealth Group Inc. NYSE: UNH has a market capitalization of $466.61 billion, ranking it as the tenth largest company in the S&P 500.

UnitedHealth, along with Humana Inc. NYSE: HUM and Elevance Health Inc. NYSE: ELV, are showing characteristics of stocks trading at low multiples relative to their potential. 

As a group, health insurers have gone through many changes in recent years, expanding into new areas of business, including providing healthcare. 

Healthcare Undervalued Sector

As a result of uncertainty permeating the industry, several of these stocks are undervalued, when viewed through a lens of their intrinsic value and their potential.

In other words, the current market price for these stocks is lower than what their true worth may be, based on fundamental analysis.

The industry can be difficult to analyze, in part because there’s been a flurry of merger and acquisition activity in the recent past. Those deals include:

• Centene Corp. NYSE: CNC and WellCare merged to become the largest health insurer by membership.
• CVS Health Corp. NYSE: CVS finalized the $8 billion acquisition of Signify Health.

The fast pace of mergers goes back nearly a decade and includes the 2015 merger of Aetna and Humana. 

While the industry is becoming bigger and more complex, the healthcare sector has been meandering along throughout this year. The Health Care Select Sector SPDR Fund NYSEARCA: XLV, whose largest component is, of course, UnitedHealth, is down 3.3% year-to-date. 

Within the sub-industry of health insurers, many of the large stocks with a history of profitability are dividend payers. The XLV ETF has a dividend yield of 1.6%. 

That’s an encouraging feature for income investors as the broader stock market remains under pressure.

Medicaid Eligibility A Question Mark

However, the healthcare sector, in particular, is facing some headwinds. Analysts see slow growth in the next couple of years, while expecting the pace to pick up in the second half of the decade. 

A large question mark concerns Medicaid, which saw coverage grow during the pandemic. States are now evaluating whether all the individuals on Medicaid still qualify for the program. If a significant number of people are removed from the program, that could lower payments for insurers, but perhaps not to the degree some analysts are predicting.  

UnitedHealth: Dividend Achiever

MarketBeat’s UnitedHealth analyst ratings show a consensus view of “moderate buy” with a price target of $575.65, an upside of 14.28%. 

The stock is up 3.72% in the past month and up 5.90% in the past three months.

UnitedHealth’s dividend yield is 1.49% and the company has a 14-year track record of boosting its shareholder payout, landing it a place on the list of dividend achievers.

Wall Street sees UnitedHealth growing earnings by 9% this year and by another 13% in 2024. 

Humana Shows Resilience with Three-Month Gain

Shares of Humana are down  3.29% year-to-date, but the stock staged a rally recently, advancing 10.88% in the past three months as it inched its way out of a consolidation. 

You can track that recent price action on MarketBeat’s Humana chart. 

Shares are trading at a forward price-to-earnings ratio of 17, indicating some optimism about the company’s future earnings, even if there are some temporary bumps in the road. 

Wall Street expects Humana to grow earnings by 13% this year and next. Humana’s dividend yield is 0.72% and the company has a 12-year history of dividend increases. 

Elevance Stock: 27.82% Upside Potential

The company formerly known as Anthem offers medical, dental, behavioral health, long-term care and disability plans. Its services are provided through affiliated companies with familiar names, such as Anthem Blue Cross and Blue Shield.

Elevance joins its health-insurer industry peers as another stock trading lower year-to-date. Shares have tumbled 12.43% so far this year. The Elevance dividend yield is 1.33%, with an annual shareholder payout of $5.92. The company has boosted its dividend for the past 12 years. 

Elevance analyst ratings show a consensus view of “moderate buy” with a price target of $568.46, an upside of 27.82%.